Friday, January 16, 2015

Much has been made of the oil price fall and how it might cause a recession. While the uncertainty caused by a fall in the most important import price to the economy does create a bit of a headwind, this is offset by the positive aspect of increased consumption and sentiment.

Ironically, however, we can project the possibility of a recession caused by oil prices - but it would be an oil price spike upward not downward.

What are you talking about Matt? You just wrote a post about how oil price is going to be pressured down over the next 6-12 months, possibly severely so. You just wrote about how oil stocks are going to be filled to busting in August 2015. Have you lost your marbles?

Ah, no...in this case the seeds of the next spike are contained in the current fall. Here's the reason - eventually this fall in price will actually stimulate demand, probably starting in late 2015 and then really gearing up in 2016, barring any self-imposed contraction (I'm looking at you Europe). I predict that it will be China and the developing world that once again are the primary engine of demand growth.

There are two problems. The first is that to balance inventories, price won't recover much even when the market is significantly out of balance. This means we won't really have any price incentive to start drilling shale again until demand and supply are seriously out of whack - perhaps on the order of 2 MBD. The second problem is that shale supply will pick up a bit conservatively at first, after the price shock they are currently experiencing - and that even drilling full bore they won't be able to close the gap. The current drop in price is predicated on weak demand and steady supply gains. If instead we had steady demand gains and steady supply gains the market would be in balance. But we can't increase faster than "steady" and so long as demand increases steadily we will remain out of balance. What this means is that oil price will have to destroy demand, and to do that we will have to go well over $100.

So here are my predictions: Oil price will break $150 in the second half of 2016. We will have a world-wide recession starting in late 2016 or early 2017.

Oil is plunging in price, and one might be tempted to make comparisons to 2008-2009. During that time, oil fell from $145 in July 2008 to $35 in January 2009, only to recover back to $70 by July 2009.

As prices fell in 2008-2009, so did rig counts, as producers in the US pulled in their horns until they could lock in better prices. It didn't take long for those rig counts to start sneaking back up though as the price recovery was relatively quick.

The big difference is that this time OPEC isn't playing along. In 2008-2009 they cut production by 4 million barrels/day. This time they aren't cutting at all. Given we are over-supplied by almost 2 MBD there isn't a clear impetus for what will end that oversupply in the short term. In fact, chances are good that OPEC wants to keep prices low for a good long time to let the US shale industry wash out.

The basic problem is this - the market is almost two million barrels/day out of balance. This means every day, even with no more production growth, two million barrels need to find a home. Even if rig counts dropped to zero in the US, US production would only drop by about 350K barrels/day per month. And as of January, rig counts have only fallen about 15% - therefore production is still growing in shale even though price has now fallen to $50/barrel. Simply put, the dropping rig count is not enough to put the market into balance in the short term.

Finally, the "nuclear option" (pun intended) is if an (admittedly unlikely) agreement between Iran and the G5 comes in June. This would send one million barrels of oil back onto the market - just when it didn't need it the most.

My projection: I think the drill rigs will continue to fall in the US at a steady rate of 50-60 rigs/week. US production will stop growing in February and will then start to decline modestly. If prices are in the $30-$50/barrel range than drill rigs will continue to fall apace. At 900 rigs in April production will be falling at 100 kbd. At 400 rigs in July production will be falling at 250 kbd, while demand grows at 100 kbd throughout the year. I project stocks will build about 285 MBD between now and August - and that prices for storage will max out in June or July.

World supply ex US will be essentially unchanged. Libya is a wild card could be bullish or bearish. Iran is a wild card bearish but unlikely. If Iran starts pumping 1 MBD, then production wouldn't come into balance with demand until November and stocks would force the issue, resulting in shut-ins to balance the market. This second scenario, albeit unlikely would create huge contango in the market. Saudis/Kuwait/UAE might decide to cut but I doubt it - only below $20.

World demand may pick up but only slowly - when oil price falls it does stimulate the economy but the shock of lower prices will offset this for at least a couple of quarters (the economy responds negatively to uncertainty even if it is positive).

Saturday, March 15, 2014

Ah…it
has come to that time of year when we are all dreaming of being outside without
a jacket on. Some subset of those dreamers are also thinking about their
gardens, getting their fingers in the soil, and watching the miracle of life
push its way up out of the soil. Some of us may have already started the year’s
first plants – an act which seems to fit into the “audacity of hope” category
given the number of record low temperatures set in the last week of February
and first two weeks of March. But given the reality of trying to grow a hot
pepper in Wisconsin, getting an early start is the only way.

Coldest Winter in Decades for Southern
Wisconsin

As we
can see fromthis dataprovided by the Department of Atmospheric
Sciences at the University of Wisconsin, the coldest winter since 1980 for
Madison, WI was the winter of 1985-86, when the average temperature (black
line) was 16.2 degrees for the 3 month period from December through February.

This
year willcrushthat mark, with an average of 14.0
degrees. And of course if you get away from the “heat island” effect of
Madison, you can take a couple more degrees off that number – temperatures
where I live 30 miles Southwest of Madison have averaged 12.1 degrees for the
winter. You’d have to go back to the winter of 1885 to find a colder average temperature
in Madison!

Now one
of the great pleasures of life in a crazy cold place like this is to warm
yourself up next to a wood fire stove – and we are blessed with an efficient
and lovely wood stove which we tend to keep going on the particularly cold
days. To see how this connects to Bayesian Inversion we need to talk about
peppers – hot peppers.

Germinating Hot Peppers

You
see, it turns out that for many people growing genuscapsicumis something of an obsession, and
while I wouldn’t call myself a “Chili Head” I certainly like spicy food and
thought I’d try my hand at growing some plants this year. The cultivars I
selected were the Long Thin Cayenne (30-50,000Scoville units) and
the Datil (100-300,000 Scoville units). Hot peppers are the topic of many fiery
discussions in the gardening community and entire forums are dedicated to thesubject. While
perusing these sites for some basic advice, I realized (much to my chagrin)
that it is infamously difficult to get these little suckers to germinate and
sprout. In addition, I learned that the company (who will remain nameless) from
which I ordered seeds has a mixed reputation. (A friend recently told me the company
has been accused of being experts on seed catalogues, but being a bit spotty on
seedgenetics.)

So it
was with some trepidation that I set out to sprout my first seeds of the year.
We picked the Datil peppers as there seemed to be a consensus that the hotter
peppers needed more time to grow. The Datil is an exceptionally hot pepper - a
variety of the speciesCapsicum chinense.From
the reading at the aforementioned forum, Capsicum Chinense varieties of hot
peppers have an exceptionally long germination period (12-25 days).
Additionally, it seemed that while there was a lot of experience on the forum,
there was very little data. In fact, I noticed a thread where somebody asked
for a chart of germination times and was greeted with a chorus of responses
that focused on how much germination time varied, rather than responding with
any data. Since I hear this objection so much in my professional life, my
interest was further piqued. Certainly there would be variation in germination
times, both because of seed variance and method, but it should also be possible
to assemble data and report it.

It was
with some surprise that I discovered more than 25% of the seeds had germinated
on day five. An additional 25% germinated on day six, and by day seventeen, 78%
of the seeds had germinated (see chart below).[1]

Calculating Population Proportion

Many seed companies test
a batch of seeds and report what percentage germinated on their seed packages.
As we all intuitively know, the more seeds tested the more confidence we can
have in the reported germination rate; but you’ll have some uncertainty in the
true germination rate of the whole population (or “population proportion”) even
if you do a relatively large germination sample. The consulting firm I work for
specializes in measurements and small sample statistics and has a useful
calculator as one of their power tools called “Bayesian Population Proportion”
which allows a user to calculate confidence intervals for germination rates.
For example if you test 200 seeds and 169 germinate, you would report an 84.5%
germination rate. But without other prior knowledge of germination rates for
that population of seed, you could only be 90% confident that the true
germination rate for the whole population was between 79.7% and 88.1%. This is
not entirely intuitive, but I think it is intuitive that we could not know the
germination rate exactly unless we tested the whole
population.

Returning to my Datil
seed experiment, we can use this calculator to calculate a 90% confidence for
the germination rate of the entire batch of Datils. The sample size was 18
seeds, of which 14 germinated. Using the BayesianPopProportion tool we find
that the 90% confidence interval for the germination rate of the whole
population is 58% to 89%. That's plenty high for me!

Using Bayesian Inversion to Calculate Required Sample Size

Different users will
have different needs in terms of confidence and germination rates. For
example, my bar for germination rate was a low 20% but I
wanted to feel 90% confident that at least 20% would germinate or I would look
to re-buy the seeds elsewhere. But I was just growing the Datils on a lark,
knowing that a hot climate plant like this needs a lot of babying to produce up
here in the north, and would never be a “main crop” producer in our garden.
Someone who runs a Community Supported Agriculture (CSA) business would have a
much higher bar for germination rates. Their livelihood depends on successful
germination and seeds can make up 5-10% of their costs. Such a farmer might
need to feel 95% confident that 75% of their seeds would germinate. In another
circumstance I can imagine an even more restrictive example. I would want to
have 95% confidence that less than 1% of a population of Space Shuttles blow up
on launch before agreeing to ride one into space. But to achieve these various
confidence levels, how many samples of each do we need? The answers are
respectively: one seed for the Datil sample, 13 seeds for the CSA farmer, and
300 launches of a space shuttle without a failure.

I created a little tool to calculate these values (Figure 3) which
I'm happy to share if you are interested. You select your requirements for
confidence level and success rate, and the tool reports the required sample
size given 0-3 failures.

Figure 3: Calculate sample size requirements for various
confidence and population proportions.

Since we bought many of
our seeds from a place with a supposed mixed reputation this year, I’m going to
sample a wide variety of seeds just to see whether I need to re-order any
seeds. This is where my calculator will come in handy. For the main plants in
our garden, I want to have 75% confidence that 60% of the seeds will germinate.
Surprisingly, I only need a sample of two seeds where both germinate to achieve
this. In any sample where one or both of the seeds fail, I can test an additional
nine seeds. As long as eight of eleven seeds germinate I have achieved my
requirements.

Conclusion

Winter was cold. I’m
looking forward to spring. Using statistics to help in your daily life is a hot
topic.

Please let me know if
you found this article interesting by commenting below. And stop over to the
Hubbard Decision Research website if you are interested in statistical tools to download.

[1]For anyone interested, I
used the "wet paper towel in a baggie" method and kept the baggie
behind my wood stove laying on the bricks. I did go to the trouble of finding a
place where the temperature varied between 65 and 90 degrees - most of the day
it is between 75 and 85 on the bricks, and it cools down below 70 for only a
few hours in the early mornings each day.

Tuesday, March 11, 2014

Our Buckeyes performed admirably through the coldest winter in SW Wisconsin in 35 years. Their set-up was a 12x20 structure with 3 walls and a roof and a partially closed off fourth wall. I put their mobile coop (which they use for sleeping and laying) inside on the West edge of the structure behind where the fourth wall was closed off - thus they were out of the wind. We attached our electric poultry netting to either side of the coop giving the birds just over 1/8 acre to roam. They also shared the coop with 7 turkeys and a dozen small wild birds.

I turned on the heat lamp if temps got below -5 F but it wasn't necessary - I did it mainly to keep egg production up. We had a day where the air temp topped out at -11 F and the wind chill was -30 or colder throughout the day and they had no problem with that (though they did look quite cold). I think having a 'coop within a coop' effectively limited wind while still allowing plenty of air to move through their structures - both the larger coop and the mobile coop are always open. Generally speaking, not much snow got in to the coop even though there was a 12 foot opening in the South wall - I think the wind had to be just right to push snow into the building - usually it drifted up about 2-3 feet south of the structure.

Toward the end of the winter (late Feb) we started to have an egg eating problem and one of the sex linked blacks got hen pecked pretty badly (she is missing feathers along her backside). I put this down mainly to stress. We had so much snow that they were pretty cooped up - they had open access but the snow drifts got up to five feet just a couple feet from their coop, effectively limiting their access to just the coop.

Limiting wind and providing a place with no wind (coop within the coop) was an important element of the success in my opinion.

I used deep litter method - just throwing hay down on top of all the shit and detritus that would build up. I also threw fresh hay down on top of snow on the rare occasion that significant snow got into the coop (I think only once). I used a 3 day thaw in January as an opportunity to clean out the litter and start them on fresh stuff. It would have been impractical to try to clean out the litter more often as it was frozen in place.

Failures:

Snow drifts caused a big problem - it limited the flocks access to forage and space. I think next winter we might try to either cut down the flock going into winter or put them in a bigger space. Then again it is not likely we have another winter as bad as this one for a while.

Snow drifts and the depth of the snow also made the poultry netting ineffective for the latter half of winter. I tried digging the fence out of the drifts a few times but it became totally impractical to keep up with it, in addition to all the other shoveling I was doing. Luckily, it seems all the predators were deep in sleep during this time. I am currently quite nervous because temps have warmed but the drifts are still over the fence in several places (as of March 11).

Egg eating in the second half of winter. To deal with the egg eating problem, I constructed a nesting box from a five gallon bucket (click link for an example image) and attached it to our mobile coop. I will construct another one once we get some melt - all my other 5 gallon buckets are under several feet of snow still. The idea here is to just get the eggs out of high traffic area - out of sight out of mind - since I believe they are eating the eggs mainly out of boredom.

Other Notes:

All livestock eat a TON during super cold winters - poultry are no exception so we went through a lot of feed. A LOT of feed.

I don't really like the fact that wild birds are in the same structure as our poultry, mainly because of the risk of disease. Not sure what to do about this or how big a risk it really is.

As an update to my posts on our chickens from last year, I wanted to report on the final count of pullets and cockerels. We had 3 chickens die - 1 on the second day, and 2 from heat exhaustion in July (human error really). Of the remaining 23, 15 were pullets and 8 were cockerels - so we got lucky in the sense that we mainly wanted egg layers. We've also picked up 4 black sex linked hens. We ate 6 of the roosters and have 2 remaining, so our current flock is 19 hens and 2 roosters.

Monday, February 24, 2014

Winter may be going out with a bang, but that hasn't stopped us from our first spring planting. The next seven days are all forecast to be more than 20 degrees below average, and Thursday Feb 27 is forecast to have a record low of -20 F. This will easily be the coldest winter since 1979 in Southern Wisconsin, and could well have been the coldest winter since 1935 or even 1901. I'm not sure how much of a "heat island" effect the city of Madison has - I know the temperatures at my house would qualify as the coldest winter since 1901 in Madison, but we've averaged about 1.5 degrees lower than the official site in Madison.

Anyway...as winter winds down we've germinated our first seeds - Datil peppers which is an exceptionally hot pepper - a variety of the species Capsicum chinense. From the reading I've done online, Capsicum Chinense varieties of hot peppers have an exceptionally long germination periods (12-25 days). Thus it was with some surprise that I noted more than 25% of the seeds had germinated on day 5. An additional 25% germinated on day 6 - I was going to be happy with 25% total germination in 25 days! For anyone interested, I used the "wet paper towel in a baggie" method and kept the baggie behind my wood stove laying on the bricks. I did go to the trouble of finding a place where the temperature varied between 65 and 90 degrees - most of the day it is between 75 and 85 on the bricks, and it cools down below 70 for only a few hours in the early mornings each day.

I've now transplanted all the seeds into wet soil, and they will remain on the bricks, covered by saran wrap until the first shoots break the soil. Then I will move them under a grow light where they will remain until late May.

Since we bought many of our seeds from a place with mixed reputation this year, I might try the paper towel method on a wide variety of seeds just to see whether I need to re-order any seeds. This is where a Bayesian Inversion spreadsheet would come in handy! If I only need to be 95% sure that 35% or more of the seeds will germinate, than I can do a trial on just two seeds - if they both germinate, I can be 95% sure that 36.8% or more of the seeds will germinate. Likewise if 3 of 4 germinate I can be similarly confident of a 34%+ germination rate, and even 3 of 5 gives me 95% confidence that 27%+ will germinate.

Sunday, December 1, 2013

Update on lake ice...

Lake Wingra froze on November 27th according to the UW AOS website. We went down there on the 28th and the ice near the shore was about 1.5 inches thick but it was gorgeous - clear, dense, and flawless - perfect for skating. Probably strong enough for a dog but definitely not for a human. Now I'm just hoping the snow holds off until the ice gets thick enough to go skating on; since we have another arctic front moving in late this week it could be as earlier as Saturday or Sunday.

As far as Monona and Mendota ice, I'm moving my best estimates back a few days: December 7th to December 12th for Monona and December 13th to December 31st for Mendota. My best guesses for the two lakes are December 8th and December 17th.